Conserving foreign reserves for sustainable development
As of January 27, 2012, the foreign exchange reserves amounted to $34.18 billion, which analysts believe, could finance goods and services imports for over six months. This is against $32.64 billion as of end of December 2011, more or less flat relative to the US$32.34 billion as of end of December 2010.
This is, however, not reflective of the high prices of Nigeria’s reference crude oil (Bonny Light) which averaged $106.32 per barrel for the year 2011. Also, the limited accretion to external reserves was due to the high demand for foreign exchange in the market.
Sanusi Lamido Sanusi, governor, Central Bank of Nigeria (CBN), said at the post Monetary Policy Committee (MPC) meeting press briefing in Abuja last week that the outlook for oil prices in the short-term as well as the forecast demand/supply balance, suggest that the current exchange rate band should be retained while still achieving moderate continuous accretion to the reserves.
The Committee noted that pressure on the exchange rate emanated from the high demand reflected in the import-dependent nature of the economy, probably compounded by the activities of speculators.
In fact, the general consensus to the solution to reserve depletion lies in the implementation of appropriate reforms with regard to industrial and trade policies aimed at reducing import-dependent nature of the economy which will help to conserve some foreign exchange.
The anticipated slack in external demand would have to be offset by generating the needed domestic demand. This, however, would require a shift in the economic development strategy that allows greater diversification of the economy without losing sight of the need to pursue sound demand management policies.
Analysts at the FSDH research limited believe that “the sustainable way to increase the external reserves is to implement policies that will engender the competitiveness of the Nigerian economy in order to increase its non-oil based exports.”
For the country to begin to reap from some of the policies which are beginning to yield fruits, government must be encouraged so as to be on track with its ongoing financial consolidation.
Indeed, analysts have expressed concern over the proposal by the National Assembly to raise the oil price benchmark to $75 pbl from $70 pbl in the budget proposal. This, to them, highlights the political challenge facing the Finance Ministry as it attempts to initiate some form of fiscal consolidation.
Should the National Assembly succeed in the proposed revision of the aspect of the budget, the practical impact will be the limited foreign exchange reserve accretion in the excess crude account, which might lead to the probability of another round of interest rate hikes.
According to Samir Gadio of Standard Bank, London, “There is no doubt that an oil-producing country like Nigeria should have posted a massive consolidated fiscal surplus amid elevated oil prices, but the continued monetisation of excess crude account proceeds (NGN810.1bn in Q3:11 alone) prevents any qualitative improvement in this area, particularly given the imbroglio over the effective launch of the Sovereign Wealth Fund.”
In fact, Sanusi posited that the partial removal of the fuel subsidy and improved prospects for the Petroleum Industry Bill had the potential to support the FX reserve and USD/NGN outlook. “The Committee has also noted comments indicating possible plans by the National Assembly to revise the budget benchmark price of oil from $ 70 per barrel to $75 or even $80 per barrel. Such a measure would significantly increase expenditures especially given the already high oil output assumptions.
In addition, it would reduce accretion to the Excess Crude Account (ECA) and increase the inflationary pressure already in place on the supply-side. Incase this happens, the likelihood of further tightening during 2012 increases. The Committee would like to reaffirm its commitment to price and exchange rate stability and its determination not to pursue an accommodative policy stance. The Committee therefore, strongly supports the recommendations of the executive for a benchmark price of a maximum of $70 per barrel.”
The governor said the committee members assessed the latest projections by the International Monetary Fund (IMF) as it indicated that global output growth which had slackened from 5.2 percent in 2010 to 3.8 percent in 2011 could decelerate further to 3.3 percent in 2012. Also, the advanced economies are expected to record a lower rate of growth of 1.2 percent in 2012 compared to the estimated 1.6 percent in 2011. The US economic growth in the coming quarters would depend a great deal on growth of the Euro area.
The Euro area is projected to record a negative growth of 0.5 percent in 2012 essentially on account of the burden of high public debt and the fragility of the credit and financial markets. Output growth in emerging and developing economies slowed down in 2011except for China, India and Brazil which posted lower growth rates in 2011 than in 2010.
But, the members observed that the Sub-Saharan Africa, including Nigeria, has been a major exception to the global trend as it is estimated to have grown by 4.9 percent in 2011 and is expected to record a higher growth of 5.5 percent in 2012.
But, the committee expressed satisfaction with Nigeria, adding: “Ahead of most African countries, Nigeria had been proactive by responding to the threats of inflation induced by fiscal spending and global food, fuel and other commodity prices as well as to the challenges of financial stability.”
